Is electricity an agricultural cooperative uses to process its members' farm products exempt from Texas sales tax under the agricultural exemption, or some other exemption?

Plain-English summary

An agricultural cooperative, apparently through a legislative inquiry (the letter notes it was sent at the request of a state representative), asked whether the electricity it used to process its members' agricultural products was exempt from Texas sales tax, and if so, why.

The Comptroller clarified an important distinction: the exemption is not based on agricultural use. Texas exempts machinery/equipment used on a farm or ranch to produce agricultural products for sale (§ 151.316(a)(7)) and machinery/equipment used by an original producer to process, pack, or market products at the producer's own location (§ 151.316(a)(8)). Similarly, § 151.317(a)(5) exempts natural gas and electricity used in agriculture (including dairy/poultry operations and farm/ranch irrigation pumping) — but that exemption does not extend to a cooperative. The letter cites Attorney General Opinion No. H-932, which advised the Comptroller that the original-producer processing/packing/marketing exemption does not apply to agricultural cooperatives.

Instead, the cooperative's electricity qualifies for a separate, more general exemption: Texas exempts natural gas and electricity used in processing tangible personal property for sale, where the electricity powers equipment that makes a physical or chemical change to the product (this is the manufacturing/processing exemption, distinct from the agricultural one). Other uses, like transportation, don't qualify. Because the cooperative uses electricity to process members' agricultural products for sale, that use fits the manufacturing/processing exemption instead.

The letter also flags a metering wrinkle: if a single meter measures both exempt and taxable electricity use, the predominant use (determined by an engineering study under § 151.317(e) and Rule 3.295(d)-(e)) decides whether the entire amount measured through that meter is treated as exempt or taxable.

What this means for you

Agricultural cooperatives

Don't assume your electricity use is exempt (or taxable) based on the agricultural exemption — that exemption is reserved for farms/ranches and "original producers" processing at their own location, and cooperatives are specifically excluded per Attorney General Opinion H-932. Instead, look to the general manufacturing/processing exemption, which can cover the same electricity use for a different legal reason. Getting the right exemption citation matters if your usage is ever audited.

Businesses with mixed exempt/taxable electricity use on one meter

If you can't isolate exempt equipment on its own meter, a predominant-use engineering study is required to determine whether the whole meter's usage counts as exempt or taxable — you can't just estimate or self-certify.

Accountants and tax professionals

This is a clean illustration of how two different Texas exemptions (agricultural under § 151.316/151.317(a)(5), and general manufacturing/processing) can reach the same practical result for different reasons, and why picking the correct one matters for cooperatives specifically excluded from the agricultural version.

Common questions

Q: Do agricultural cooperatives qualify for Texas's agricultural sales tax exemption?
A: No — per Attorney General Opinion H-932 (cited in this letter), the agricultural exemption for machinery/equipment/electricity used by an "original producer" does not extend to cooperatives.

Q: If cooperatives don't get the agricultural exemption, is their processing electricity always taxable?
A: Not necessarily — it can still qualify under the separate manufacturing/processing exemption if it powers equipment that makes a physical or chemical change to the product being processed for sale.

Q: What happens if one electric meter covers both exempt and taxable uses?
A: A predominant-use engineering study (per § 151.317(e) and Rule 3.295(d)-(e)) is required; its result determines whether the entire meter's usage is treated as exempt or taxable.

Q: Can another agricultural cooperative rely on this letter?
A: No. It addresses this cooperative's specific facts; a different cooperative's electricity use would need its own analysis, though the underlying legal framework (agricultural exemption unavailable to co-ops; manufacturing exemption potentially available) is generally applicable.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.316(a)(7), (8) (Agricultural Exemption — Machinery/Equipment)
• Tex. Tax Code § 151.317(a)(5) (Agricultural Exemption — Gas and Electricity)
• Tex. Tax Code § 151.317(e) (Predominant Use Study Requirement)
• 34 Tex. Admin. Code Rule 3.295(d), (e) (Natural Gas and Electricity)
• Texas Attorney General Opinion No. H-932

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200107373L

Original ruling text

July 3, 2001

Dear **:

State Representative David A. Swinford, District 87, recently asked that I send
you this letter explaining that the electricity used by your cooperative to
process members' agricultural products is exempt from sales tax. This
exemption is not because of agricultural use, however, but because of use in
manufacturing and processing.

The sales tax law exempts machinery and equipment used on a farm or ranch in
the production of agricultural products held for sale in the regular course of
business. The sales tax law also exempts machinery and equipment used by an
original producer to process, pack or market products at a location operated by
the original producer. Texas Tax Code Section 151.316(a)(7) and (8).

Texas Tax Code Section 151.317(a)(5) exempts natural gas and electricity used
in agriculture, including dairy or poultry operations and pumping for farm or
ranch irrigation, but this exemption does not extend to use by a cooperative.

However, Texas sales tax law exempts natural gas and electricity used in
processing tangible personal property for sale. For example, electricity used
to power equipment that makes a physical or chemical change to the product
qualifies for exemption, but other uses, such as transportation, may not.

The cooperative's use of electricity to process the members' agricultural
products for sale qualifies for this exemption.

If a single meter measures both exempt and taxable uses of electricity, the
predominant use will determine whether the total amount of electricity measured
through that meter will be exempt or taxable. Predominant use is determined
through an engineering study as prescribed in Texas Tax Code Section 151.317(e)
and Rule 3.295 (d) and (e) concerning natural gas and electricity.

I am enclosing a copy of Attorney General Opinion No. H-932, which advised the
comptroller that the exemption for machinery and equipment used by an original
producer to process, pack and market the producer's agricultural products did
not apply to agricultural cooperatives.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free 1-800-531-5441, extension 3-4683, if you have any
questions or need more information. My email address is
[email protected], or you may write to Tax Policy Division,
Comptroller of Public Accounts, P.O. Box 13528, Austin, Texas 78711-3825.

Sincerely,

Eddie C. Washington
Tax Policy Division